There is widespread concern about the slow growth in non-farm business productivity. Over the past 20 quarters (five years) since Q1 2010, it is up only 0.5% on average during each of the Q1-to-Q1 periods spanning the five years: 0.4% through Q1 2011, 0.9% through Q1 2012, 0.5% through Q1 2013, 0.6% through Q1 2014, and 0.3% through Q1 2015. That's awfully weak growth.
There are lots of different reasons to be concerned. Fed Chairwoman Janet Yellen is worried that wage gains are being held down by weak productivity. Bond investors are worried that inflation might rebound if tightening labor markets push up labor costs, with wages rising faster than productivity. In this scenario, stock investors would fret that profit margins would be squeezed if labor costs rise faster than prices. Progressives are saying that companies are using their cash and borrowings to buy back their shares rather than invest in productivity-enhancing capital equipment. They claim that's worsening income inequality.
In other words, everyone wants to see productivity growing at a faster pace. The key reason is that productivity is the key determinant of consumers' purchasing power (i.e., real income) and the standard of living (i.e., consumption). However, there are measures of these two variables suggesting that the productivity problem may not be as serious as widely believed. Consider the following:
(1) Long term. First, let's keep in mind that technological innovations -- which are the key drivers of productivity -- tend to be lumpy. They don't happen continuously over time, and they take time to be adopted once they are ready for prime time. We can see this by looking at the growth in productivity over 24-quarter periods. Since the early 1950s, productivity grew especially fast during the 1960s and the late 1990s and the first few years of the next decade. Before and after these bursts, the pace of productivity growth was relatively subpar.
(2) Short term. On a shorter-term basis, productivity jumped 5.2% through Q1 2010 from Q1 2009 before the slowdown since then. That boosts the average productivity growth rate a full percentage point to 1.3% per Q1-to-Q1 period over this six-year time span. I constructed a good proxy for productivity by dividing real GDP by the average weekly hours index in the private sector. I did so because there are no official productivity measures for goods and services industries in real GDP.
I constructed proxy measures of productivity in goods and services industries by dividing their contributions to real GDP by their average weekly hours indexes. Both proxies jumped during 2009. Goods productivity has continued to trend higher at a slower pace, but services productivity has dropped 5.7% through Q1 2015 from Q4 2009! That seems very odd and suggests that the government's bean counters may be having an especially tough time counting the beans in services.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.